Just when you think the selloff couldn’t get any scarier, it did. The last hour of trading took over 1% out of the S&P 500 in rapid fashion, reportedly on fears of an Ebola check at a major U.S. airport. Today we offer up a “Top 10” list of specific markets and indicators to watch for signs of a near term market bottom. They include the CBOE VIX Index (key levels at 26 and 32), the action in small cap stocks and crude oil, and the dollar. Less quantifiable issues – but important nonetheless – are headlines related to Ebola (probably getting worse before better), 10-year Treasury bond yields (2.0% and 1.5% possible here), and European policymakers addressing a host of difficult monetary and fiscal policy issues. Bottom line: this is unlikely to be a dramatic “V-bottom” low given the range of issues of concern to investors. Look for the majority of our “Top 10” to stop going down before calling a bottom.
What if there was some degrees of freedom in the centrally planned capital markets that rational, non-emotional and non-ideologically-laden thinking could shed light on ? Here is such an attempt
The may be secret agreements and a grand conspiracy to manipulate the capital markets and commodities, but they are still largely understandable through rational analysis. Not being privy to such secret deals, here is one man's view of the near-term technical outlook for the foreign exchange market, bond, commodities and stocks.
And just like that. everything is crashing. Whether it is Asia, Europe, or even US futures, an entire generation of traders are waking up to something few have seen in the past 6 years: a very rare sea of red only this time with the main difference that the perpetual backstop of all risk, the Fed and/or "Edward Quince", may not be there to halt the collapse.
Global Equities In "Sea Of Red" After German Industrial Data Horror, Hints Japan May Give Up On Weak YenSubmitted by Tyler Durden on 10/07/2014 06:44 -0400
While the economic data, especially out of Europe, just keeps getting worse by the day, with the latest confirmation that Europe is now officially in a triple-dip recession coming out of Germany and the previously observed collapse in Industrial Production which tumbled the most since February 2009, it was once again the Dollar and especially the New Normal favorite currency, the Yen, that was in everyone's sights overnight, when it first jumped to 109.20 only to slide shortly after midnight eastern, when Abe repeated once again that a plunging Yen is hurting small companies and consumers - and to think it only took him 2 years to read what we said would happen in late 2012 - but also the BOJ minutes which did not reveal any addition easing, which apparently disappointed algos and triggered USDJPY slel programs, pushing the USDJPY 80 pips lower to 108.40.
While the biggest micro news of the weekend is certainly the report that Hewlett-Packard has finally thrown in the towel on organic growth (all those thousands laid off over the past ten years can finally breathe easily - they were not fired in vain), and has proceeded to do what so many said was its only real option: splitting into two separate companies, a personal-computer and printer business, and corporate hardware and services operations (which will certainly lead to even more stock buybacks only not at one but two companies) which in turn has sent its stock and futures higher, perhaps the most notable development in the macro world is Japan's realization finally that the weaker Yen is crushing domestic businesses, which has resulted in the USDJPY sliding to lows last seen at Friday's jobs report print, and also generally leading to across the board wekness for the dollar, whose relentless surge in the past 3 months is strongly reminiscent of the euphoria following the Plaza Accord, only in the other direction (and making some wonder if the Plaza Hotel caterer are about to see a rerun of September 22, 1985 in the coming weeks).
While the 0.001% of the world dine together and plan their next moves, here are the main events in the week ahead.
Have the S&P 500 and Dow Jones Industrial Average seen their highs for the year? At this point in 2014, it’s probably a coin toss. There are several factors in favor of a further rally, to be sure. Corporate profits are still robust, revenue expectations are modest, and long term interest rates remain equity-friendly. On the flip side of the U.S. equity market coin: long term valuations are toppy, plenty of other markets (commodities, bonds) seem to signal an impending global recession, and a host of geopolitical concerns now seem to be hitting a full boil. Also, let’s not forget that the Russell 2000 peaked in, oh, March (1209) and July (1208) and is down 8.8% from that last high. By that measure, equities are already rolling over. It is true that markets climb a wall of worry. Until it falls on them.
Heavy volume and volatile price action early in stocks and high-yield credit markets subsided later in the day as despite several big stocks in the red, the indices jammed higher in the last hour desparate to get positive (on terrible volume) but failed. Treasury yields fell 3-4bps early on and stuck near the lows of the day (ignoring equity's exuberance). High-yield credit rallied back off early spike wides at 380bps (with desks noting heavy demand for protection) but remains worse than stocks. VIX tested above 17 and crashed back below 15.5. The USD ended the day unchanged (AUD weakness notable) but gold and silver slipped lower with oil (back over $93) and copper up on the day. Camera-on-a-stick smashed over 11% higher to $91.50 as the 41% float short continues to get squeezed out.
The key question now is “Can the U.S./global economy handle a meaningful downturn in financial asset prices?” The short answer is that it may not have a choice. The Federal Reserve has done what it can to juice the American economy and has the balance sheet to prove it. Central banks, for all their power, do not control long term capital allocation or corporate hiring practices. Fed Funds have been below 2% for six years. If the U.S. economy can’t continue to grow in 2015 as the Federal Reserve inches rates higher, there are clearly larger issues at play. And those private sector problems will need private sector solutions.
Simple review of technical condition of the capital markets. Light on polemical zeal, and heavy on technical analysis.
Some believe that actions today were jointly agreed to by the Fed and ECB to allow the stimulus baton to be passed from one major central bank to another. Could this be to help ease the risk-off fallout that is likely to ensue in anticipation of the first Fed hike? Maybe the price action in US equity markets today should serve as an early warning signal.
Even as the NATO summit began hours ago in Wales, conveniently enough (for Obama) at the venue of the 2010 Ryder Cup, so far today geopolitics has taken a backseat to the biggest event of the day - the ECB's much hyped and anticipated announcement. So anticipated in fact that even as it has been priced in for the past month, especially by BlackRock which is already calculating the Christmas bonus on its "consultancy" in implementing the ECB's ABS purchasing program and manifesting itself in record low yields across Europe's bond market, Reuters decided to milk it some more moments ago with the following blast: "Plans to launch an asset-backed securities (ABS) and covered bond purchase programme worth up to 500 billion euros are on the table at Thursday's European Central Bank policy meeting..." The notable being the size of the program, which at €500 billion, is precisely what Deutsche Bank said a week ago the size of the ABS program would be. Almost as if the bank with the world's biggest derivative exposure is helping coordinate the "Private QE"...
Heading into the North American open, the bulk of the morning’s price action has been provided by news that Ukrainian President Poroshenko said that he reached an agreement with Russia's Putin on a "permanent cease fire" in Eastern Ukraine's Donbass region. This saw an immediate spike higher in European equities with the DAX future rallying and breaking above its 100DMA seen at 9644.50, thus extending earlier gains that stemmed from the strong performance in Asia-Pacific equities, while the e-mini S&P once again printed a fresh record high. However, these moves staged a partial reversal amid comments from Russia’s Putin that he denied that such an agreement had been reached as Russia is not a party to the Ukraine conflict. In stock specific news, Russian exposed Raiffeisen Bank outperforms Europe (+7%) in reaction to the geopolitical developments, while Hugo Boss have underperformed throughout the session following a share placement which came in at the lower end (-5.3%).
Dispassionate overview of the week ahead, with thoughts about September.